Moody’s Downgrades Brazilian Sovereign Credit to Junk

By Lise Alves, Senior Contributing Reporter

SÃO PAULO, BRAZIL – The economic scenario in Brazil deteriorated on Wednesday as Moody’s downgraded the country’s sovereign risk to junk status and changed the country’s outlook to negative. Moody’s was the last of the three large risk-rating agencies to lower Brazil’s credit ratings.

“[Brazil’s] deterioration is expected to continue over the coming three years, given the scale of the shock to the Brazilian economy, the lack of progress made by the government in achieving its fiscal and economic reform objectives and the political dynamics expected to persist over that period,” said the statement released by the agency on Wednesday, February 24th.

According to Moody’s among the main factors to contribute to the downgrade was the prospect of further deterioration in Brazil’s debt, with the government’s debt likely to exceed eighty percent of GDP within three years. “We expect GDP growth to average a negative 0.5 percent over the period 2016-2018.”

Also pressuring the country’s economy is the turbulent political dynamics, which is likely to hinder authorities’ fiscal consolidation efforts and delay structural reforms. “Approval by Congress will be difficult given the government’s limited support in Congress and ongoing political challenges facing the President,” the report concluded.

The agency stated that it now forecasts a slower recovery of the Brazilian economy than previously and risks of further deterioration to Brazil’s credit profile due to possible macroeconomic shocks.

The head of the Economic Department at Brazil’s Central Bank, Tulio Maciel, however, said the credit impact of the latest decision should not be large, since these were already absorbed by the downgrades last year by the other two ratings agencies.

“This will not alter the credit market in Brazil,” Maciel was quoted as saying by Agencia Brasil. According to the Central Bank official the sources for credit offered are domestic and not foreign.

Last week Standard & Poor’s (S&P) lowered its long-term foreign currency sovereign credit rating for the country and changed the country’s outlook to negative.

In September of 2015 S&P was the first agency to withdraw Brazil’s investment grade, followed by Fitch in December.